BlackRock: U.S. Sovereign Debt Risk Is Subsiding

In the latest BlackRock Sovereign Risk Index rankings, Richard Turnill points out that the U.S. has improved and names some of the biggest movers for the quarter.

Our BlackRock Sovereign Risk Index (BSRI)—a framework for assessing sovereign risk across 50 countries—shows a recovery in the United States’ sovereign risk profile over the past four years. The U.S.’s “Fiscal Space” score component—our measure of fiscal sustainability—has flipped to a sizable positive from a drag, and the country’s overall ranking has gradually improved. See the chart below.

This improvement is a product of lower spending, an apparent slowdown in health care cost increases in recent years, low interest rates reducing debt servicing costs and steady, if historically subdued, economic growth. It means the U.S. economy appears to be in much stronger shape than it was during the last presidential election campaign of 2012, and we expect fiscal policy to become less of an economic drag going forward over the near term.

The U.S. fiscal turnaround may be fleeting, however. Slower economic growth as aging baby boomers exit the workforce, and growing projected health care and Social Security outlays will likely lead to rising budget deficits and debt-to-GDP levels over the coming decade under current policies, 2016 Congressional Budget Office (CBO) projections suggest.

The U.S. sovereign risk profile still has room for improvement as well. Each country’s BSRI score and ranking is based on four main categories: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%). Fiscal Space assesses whether a country is on a fiscally sustainable path, while External Finance Position examines how leveraged a country might be to macroeconomic trade and policy shocks outside of its control. Financial Sector Health measures how healthy a country’s financial sector is, and Willingness to Pay gauges how able and willing a country is to pay off its debt.

The U.S. currently ranks 13th out of the 50 countries we track, an overall ranking unchanged since the same quarter a year ago. According to our most recent quarterly ranking update, it currently scores most highly on Willingness to Pay and weakest in External Finance.

So which countries were the biggest movers in our latest BSRI update?

Ireland leapt six spots in our rankings to 17th place—the largest rise for the quarter. Lower net debt levels and an improved budget deficit outlook boosted its ‎Fiscal Space score into positive territory for the first time since the BSRI’s 2011 launch. India climbed four spots, as its Willingness to Pay profile improved against a backdrop of reforms by Prime Minister Narendra Modi’s government.

The UK slipped two spots to 20th place despite a marginally higher score. Its Fiscal Space score fell on worsening budget deficit prospects. Economic and political uncertainty are on the rise as the impact of a Brexit vote unfolds.

Elsewhere, Turkey dropped by three notches to 34th spot, as the country grappled with heightened political uncertainty in the aftermath of an attempted coup, and Spain suffered a four-notch fall—the steepest in our 50-country index. Rising debt levels and a deteriorating budget deficit outlook eroded Spain’s Fiscal Space score. This was slightly offset by an improved Willingness to Pay score, as the resignation of socialist opposition leader Pedro Sanchez offered hope of ending months of political deadlock.

Read more on the U.S.’s sovereign risk profile and on how the various countries stack up in our full BSRI interactive graphic, which includes country details and side-by-side country comparisons.

The iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ:TLT) fell $0.70 (-0.53%) to $130.30 per share in Tuesday morning trading. Year-to-date, the largest ETF tied to long-term U.S. government debt has risen 7.9%.